David Hultstrom of Financial Architects puts out a great quarterly newsletter for financial advisors (and a great one for investors as well). In the most recent version of his advisor newsletter, he posted the following chart below with some great commentary that I wanted to share with you.

The average compound return (i.e. geometric) is 9.75% (red line). Only in 1992 did an annual return round to 10%.

In only 5 out of the 93 years was it even within two percentage points of that (i.e. between 7.75% and 11.75%). (emphasis mine)

So the first lesson is that the market is almost never what people consider “normal.”

The second lesson is that the range of returns is likely much higher than you think. The worst calendar year was -44% (1931) and the best was 57% (1933) – peak to trough, or annually by month or day would be even more extreme, these are just calendar years.

The third lesson is that there aren’t any patterns. Cover the right side with your hand and try to predict the next returns by looking at the past ones (without cheating by knowing what happened historically). No predictability, despite common thinking that there are bull markets and bear markets with some sort of regularity.

Finally, this isn’t a lesson, but I feel compelled to remind my readers that just because the historical average was 9.75% that in no way implies that will be the average in the future. I (and most serious/knowledgeable analysts) believe future returns will almost certainly be lower. In other words, as the disclaimers say (accurately): “Past performance is no guarantee of future results.” Your mileage may vary.

The point of sharing this is to encourage you to verify that your plan accounts for this type of dynamic return schedule. Planning for a flat average annual return isn’t generally a prudent way to approach distribution planning. You’ll want to ensure you have sufficient income to maintain your lifestyle through all market environments and step one of accomplishing this is to account for sporadic annual returns.

If your advisor has not discussed what your plan might look like through various market environments, consider asking him/her directly. It’s your retirement; you need to make sure you’re in the driver’s seat when it comes to covering all your bases.

Thanks for reading!
Ashby Daniels

I am a Pittsburgh Financial Advisor that specializes in working with people transitioning into retirement. If you’d like more information, see Who We Serve. Or to contact me, go here.

Disclaimer: Any opinions are those of Ashby Daniels and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.